UGL (NZ) Limited v Trade Indemnity + Surety Limited
[2013] NZHC 2623
•9 October 2013
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
CIV 2013-404-003480 [2013] NZHC 2623
BETWEEN UGL (NZ) LIMITED Plaintiff AND
TRADE INDEMNITY+ SURETY LIMITED
Defendant
Hearing: 9 October 2013 Appearances:
D M Hughes and E E Cowle for the Plaintiff
W G C Templeton for the DefendantJudgment:
9 October 2013
JUDGMENT OF GILBERT J
This judgment was delivered by me on 9 October 2013 at 3.30 pm
Pursuant to Rule 11.5 of the High Court Rules.
Registrar/Deputy Registrar
Date:
UGL (NZ) LIMITED v TRADE INDEMNITY+ SURETY LIMITED [2013] NZHC 2623 [9 October 2013]
[1] UGL (NZ) Limited seeks summary judgment against Trade Indemnity
+ Surety Limited for $1,210,028.54 being the monies said to be payable under a bond. The critical issue is whether UGL must prove loss before it is entitled to payment under the bond. UGL concedes that if it is required to prove loss, its application for summary judgment must be dismissed because the quantum of loss cannot be determined in this application. The sole issue for determination therefore concerns the proper construction of the bond.
Background
[2] UGL contracted with Transpower New Zealand Limited to design, manufacture and install underground cables between the Hobson, Penrose and Pakuranga substations. UGL subcontracted some of the work to JB Contractors Limited (now in receivership and in liquidation) pursuant to a subcontract agreement dated 1 September 2011. The “Subcontract Sum” was $12,100,285.42 excluding GST.
[3] JB Contractors agreed to provide security for 10 per cent of the Subcontract Sum to ensure its performance under the subcontract. Clause 4 of the subcontract agreement relevantly provides:
4 Security
4.1Security is for the purpose of ensuring the due and proper performance of this Subcontract. The Subcontractor will provide security in an amount equal to ten percent of the Subcontract. The security will be in the form of an unconditional undertaking given by a New Zealand or Australian bank.
4.2Security will be lodged with UGL when this Subcontract, executed by the Subcontractor, is returned to UGL. No payment otherwise due under the Subcontract shall become payable until the Subcontractor and its surety have executed and delivered the security to UGL.
4.3UGL will be free to convert the Security into money upon breach by the Subcontractor of any of its obligations under this Subcontract. UGL will not be liable for any loss caused by the conversion. UGL will release the security on the expiration of the Defects Liability Period.
[4] Rather than obtaining an unconditional undertaking from an Australian or New Zealand bank, JB Contractors procured a bond from Trade Indemnity in the form of a deed which Trade Indemnity signed as Surety. UGL accepted this bond as performance of JB Contractors’ obligation under cl 4 of the subcontract agreement, even though it did not strictly conform to the requirements of that clause.
[5] The recitals to the bond record that JB Contractors is required to provide UGL, as the Principal, with security in the form of a bond to ensure performance of its obligations as the Contractor under the subcontract agreement. The bond provides that Trade Indemnity as the Surety is jointly and severally liable with JB Contractors for payment of the sum of $1,210,028.54 (cl 1); sets out the circumstances in which the bond will become null and void (cl 2); provides that, except as set out in cl 2, the bond shall remain in full force and effect (cl 3) and that the Surety will not be released from liability in certain circumstances that would otherwise release a surety (cl 4); and records that the bond shall be governed by New Zealand law (cl 5).
[6] For the purposes of this application, the key clauses are clauses 1 and 2:
1.The Contractor and Surety are jointly and severally held and bound to the Principal in the sum of $1,210,028.54 and bind themselves, their successors and assigns jointly and severally for the payment of that sum.
2. THE condition of this bond is that it shall be null and void if:
(a) The Contractor duly carries out and fulfils all the obligations imposed on the Contractor by the Contract Documents prior to the commencement of the Period of Defects Liability referred to in the Contract Documents; or
(b) The Contractor satisfies and discharges the damages sustained by the Principal in respect of all the faults by the Contractor up to the commencement of the Period of Defects Liability or the termination of the contract; or
(c) The Surety satisfies and discharges up to the amount of the bond the damages sustained by the Principal in respect of all defaults by the Contractor up to the commencement of the Period of Defects Liability or the termination of the contract; or
(d) A Practical Completion certificate has been issued in respect of the Contract Works in accordance with the General Conditions of Contract.
Breach by JB Contractors
[7] JB Contractors was put into receivership in late July 2012 and in liquidation on 2 August 2012. UGL claims that this constituted a breach under the subcontract agreement. It relies on cl 26.1(e) and 26.2 which provide:
26.1 UGL may terminate this Subcontract by notice in writing:
…
(e) If the Subcontractor commits an act of bankruptcy or enters into any arrangement or composition with its creditors or a receiver is appointed or being a company enters into liquidation either compulsorily or voluntary or suffers or allows any execution to be levied on its property or against it or a statutory manager is appointed.
26.2Where this Subcontract is terminated pursuant to cl 26.1(a) to (f) then the Subcontractor shall be deemed to be in breach and UGL shall be liable only for … and for no other sum or sums whatsoever.
[8] Although UGL did not plead or provide any direct evidence of having terminated the subcontract by notice in writing, it is likely that it did so. As a result of its liquidation, JB Contractors was unable to complete the subcontract works. The evidence shows that UGL contracted with another subcontractor to complete the subcontract works.
Claimed losses
[9] UGL claims to have suffered losses in the sum of $2,522,350 as a result of JB Contractors’ insolvency and consequent failure to complete the subcontract works. This sum is calculated as follows:
Additional sum payable to replacement
subcontractor to complete the subcontract works $593,601
Corrective Action & Remedial Works $821,440
Additional UGL Management Supervision $125,109
Liquidated damages for delay $982,200
$2,522,350
Interpretation of the bond
[10] Mr Hughes submits that the bond must be interpreted in the light of cl 4 of the subcontract agreement because it was provided in terms of JB Contractors’ obligation to provide security under that clause and the recitals to the bond record this. Although the bond does not contain any express obligation requiring Trade Indemnity to make payment on demand in the event of any breach by JB Contractors under the subcontract agreement, he argues that cl 4.3 of the subcontract agreement supports his contention that this is how the bond should be interpreted:
UGL will be free to convert the Security into money upon breach by the
Subcontractor of any of its obligations under this Subcontract
[11] Mr Templeton submits that cl 4 of the subcontract agreement does not assist UGL because the form of security provided by Trade Indemnity and accepted by UGL does not meet the requirements of this clause. He accepts that the type of security anticipated under cl 4.1 may well have been an unconditional undertaking from a New Zealand or Australian bank to make payment on demand and refers to the Court of Appeal’s decision in Society of Lloyd’s & Oxford Members’ Agency Ltd
v Hyslop1 as an example of a case involving such a guarantee or undertaking.
McKay J described the form of undertaking in that case as follows:2
The guarantee is in the form of an undertaking by the Bank, in the event of default by Mrs Hyslop under the Trust Deed, to pay $70,000 to Lloyd’s upon demand. Default is for this purpose to be “conclusively proved” by the certificate of a duly authorised officer of Lloyd’s.
[12] The bond issued by Trade Indemnity is materially different from an
unconditional ‘on demand’ bond such as was considered by the Court of Appeal in
Hyslop. Whether or not UGL would have been entitled under cl 4 of the subcontract
1 Society of Lloyd’s & Oxford Members’ Agency Ltd v Hyslop [1993] 3 NZLR 135.
2 At 153.
agreement to compel JB Contractors to provide such a bond is not the issue. UGL accepted the bond that was provided by Trade Indemnity. The critical issue concerns the interpretation of that bond.
[13] The bond provided by Trade Indemnity does not require payment on demand following a breach by JB Contractors under the subcontract. It contains no such provision. The bond is in the nature of a contract of guarantee. Trade Indemnity’s obligation in the present circumstances is to pay the damages sustained by UGL in respect of all defaults by JB Contractors up to the date of termination of the contract.3 UGL must therefore prove breach and loss before it can recover under the bond. I note that the House of Lords reached the same conclusion in respect of a bond in materially the same terms in Trafalgar House Construction (Regions) Ltd v General Surety & Guarantee Co. Ltd.4
[14] It follows that UGL’s application for summary judgment must be dismissed. This may finally dispose of this proceeding because, subject to any appeal, the liability under the bond will be determined at arbitration between JB Contractors and UGL. Mr Hughes wishes to reflect on this issue and will notify the Court if the proceeding is to be discontinued by 29 November 2013.
Result
[15] The application for summary judgment is dismissed. [16] Costs are reserved.
M A Gilbert J
3 Clause 2(c).
4 Trafalgar House Construction (Regions) Ltd v General Surety & Guarantee Co. Ltd [1996] 1
A.C.199.
2
0
1